With the 2021 tax season quickly approaching, much of the national focus has been on the current administration’s proposed changes for tax years beginning after December 31, 2021. While the proposed changes are important to monitor, let’s revisit some of the changes enacted in 2020 that could impact your 2021 return.
The Consolidated Appropriations Act of 2021 was signed into law on December 27, 2020. It includes two tax relief acts, the COVID-related Tax Relief Act of 2020 (CRTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA), both of which directly impact individual taxpayers. Most taxpayers are likely familiar with the CRTRA as it granted eligible individuals a one-time recovery rebate credit (aka “stimulus payments”) of $1,200 or $2,400 for couples (plus $500 per qualifying child).
The TCDTRA provides additional tax relief for individuals and businesses alike. The following are some of the highlights included in the Act that affect individual taxpayers:
Charitable Deductions for Individuals
For the 2020 tax year, the CARES Act allowed individuals who elected the standard deduction a $300 above the line charitable deduction for qualified charitable contributions. For the 2021 tax year, individuals may claim the $300 deduction and married individuals filing a joint return may claim up to a $600 deduction for cash contributions made to qualifying charities during 2021.
Lifetime Learning Credit
The Lifetime Learning Credit is available to eligible students enrolled in an eligible educational institution and provides a maximum $2,000 credit equivalent to 20% of the first $10,000 in qualified educational expenses. There is no limit on the number of years the credit can be claimed. For 2021, the Modified Adjusted Gross Income (MAGI) phaseout limits have been increased to a range of $80,000 - $90,000 for individual taxpayers and $160,000 - $180,000 for married filing jointly taxpayers. Keep in mind that this credit is nonrefundable and is per tax return, not per student.
Medical Expenses
The TCDTRA made permanent the deduction of qualified unreimbursed medical care expenses that exceed 7.5% of a taxpayer’s AGI for tax years after December 31, 2020.
Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness
The TCDTRA extends the exclusion from gross income for discharges of principal residence indebtedness before January 1, 2026, and reduces the maximum acquisition indebtedness limit to $750,000 ($375,000 for married filing separately).
Treatment of Mortgage Insurance Premiums as Qualified Residence Interest
The TCDTRA extends, through 2021, the current treatment of qualified mortgage insurance premiums as interest for the purposes of the mortgage interest deduction.